Estimating System Deficiencies Found During Audit of Proposed Fiscal Year 2003 Forward Pricing Labor Rates
Reference Number: 2003-1C-087
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April 21, 2003
MEMORANDUM FOR DAVID A. GRANT
DIRECTOR OF PROCUREMENT
INTERNAL REVENUE SERVICE
FROM: Daniel R. Devlin /s/ Daniel R. Devlin
Assistant Inspector General for Audit (Headquarters Operations and
Exempt Organizations Programs)
SUBJECT: Estimating System Deficiencies Found During Audit of Proposed Fiscal Year 2003 Forward Pricing Labor Rates (Audit #200310002.029)
The Defense Contract Audit Agency (DCAA) audited a certain contractor’s Civil Division estimating practices used in preparing its proposed direct labor forward pricing rate and full-time accounting factor proposals dated August 21, 2002. The proposals were effective July 6, 2002, through June 30, 2003. The purpose of this audit was to determine if the contractor consistently complied with established estimating system internal controls for developing accurate, current, and complete cost estimates.
The DCAA opined that certain estimating practices used by the contractor in preparing the forward pricing direct labor rates proposed for July 6, 2002, through June 30, 2003, require corrective action to improve the reliability of its future direct labor rate estimates. The DCAA noted that the contractor is lacking adequate policies and procedures for calculating direct labor forward pricing rates and adequate policies and procedures for inclusion of all Civil Division employees for forward pricing direct labor rate purposes and calculations. Due to the number and significance of the variances in labor category rates, the DCAA concluded that using only annual escalation rates to project direct labor rates for future years is not appropriate and may result in over- or under-bidding labor rates for Federal Government contract purposes. In addition, the contractor’s practice of excluding certain employees for forward pricing labor rate development is an estimating deficiency that may also lead to over- or under-bidding on Federal Government contracts.
The DCAA was unable to estimate the magnitude of the total potential cost impact of the estimating system deficiencies; however, approximately $2.4 billion in proposals were submitted by the Civil Division to the Federal Government during Fiscal Year 2002. The DCAA recommends that the contractor’s Civil Division develop adequate written policies and procedures for calculating direct labor forward pricing rates.
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